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A Hedge Fund With High Returns and High-Reaching Goals

ON June 13 at the Pierre Hotel in Manhattan, the Children's Investment Fund, known as TCI, a large hedge fund in London, welcomed a particularly high-profile speaker: former President Bill Clinton.

But Mr. Clinton was not speaking exclusively about the fund, whose 23 percent net returns through September make it a darling of institutions and wealthy families flocking to hedge fund investing. Instead, he focused on the Children's Investment Fund Foundation, TCI's charitable arm, which is financed by a portion of the fund's fees.

TCI and its foundation were started in 2004 by Christopher Hohn, a British money manager. Today, the fund has more than $9 billion. The foundation, which has offices in New York and London, had $66 million at the end of last year and distributed more than $2.3 million to international health and development causes, according to its 2005 United States tax returns. Recipients included the International Rescue Committee and many H.I.V.- and AIDS-related projects.

"The marriage of business and philanthropy that is at the heart of the Children's Investment Fund and the Children's Investment Fund Foundation provides a great tool to effect serious change in the developing world," wrote Mr. Clinton in an e-mail message about his work with the fund and the foundation, which supports his own foundation's efforts to provide care for children with AIDS around the world. "I was glad to be able to tell the investors about the good work their support is enabling my foundation to do."

In the last decade, the hedge fund industry has exploded, as have the paychecks of its billionaire money managers. Some individuals are well known and have focused their attention on issues from child abuse to charter schools. Paul Tudor Jones II, founder of the Tudor Investment Corporation, started the Robin Hood Foundation, which fights poverty in New York City. This year, the foundation raised $48 million in one night at its annual benefit.

Arthur J. Samburg, founder of Pequot Capital Management, gave $25 million to Columbia Business School to establish the Samberg Institute for Teaching Excellence, offering mentoring and other programs.

But Mr. Hohn and his wife, Jamie Cooper-Hohn, who runs TCI's foundation, took a different tack: they are using a portion of the fees generated by the hedge fund to finance the foundation and thus donate to charity.

The business model for the hedge fund is unusual for another reason: Mr. Hohn has been branded one of Europe's most feared activist investors, those who rankle management to extract shareholder value. His biggest coup so far was leading a shareholder revolt starting in 2005 against Werner G. Seifert, the chairman and chief executive at the Deutsche Börse, which operates the Frankfurt Stock Exchange.

In December 2004, Mr. Seifert tried to buy the London Stock Exchange. Mr. Hohn, a large shareholder in Deutsche Börse, did not see the value of the purchase and demanded that the acquisition be put to a shareholder vote. A nasty battle erupted and, ultimately, the campaign killed the bid and Mr. Seifert's job. (Nasdaq this year paid more than twice the amount Deutsche Börse offered to buy a stake in the London Stock Exchange.)

Mr. Hohn and Ms. Cooper-Hohn declined to be interviewed for this article. (Even photographs of Mr. Hohn are difficult to find for publication.) Investors in the hedge fund who agreed to speak did so with trepidation and requested anonymity. They are required to sign nondisclosure agreements that prohibit sharing any information about the fund. The consequence for violating the agreement, investors say, is getting kicked out of the fund.

Competitors praise Mr. Hohn's business model for the hedge fund. "Hohn is a marketing genius," said a hedge fund manager. "Who wants to go up against a firm whose name is the Children's Investment Fund?"

When the fund was started, it posed some tricky issues for investors, especially endowments with a fiduciary duty to look after the bottom line of their own institutions rather than finance Mr. Hohn's causes, however worthy they might be.

"We were somewhat concerned that a portion of the fees we were paying were explicitly designed to go to a charity," said one investor who decided to participate in the fund. "It's not that we aren't charitable, but we are a not-for-profit ourselves, and the idea that we would be explicitly paying a higher fee to support Chris Hohn's charitable enterprises and not our own was a bit of a sticking point."

Mr. Hohn, the son of working-class Jamaican immigrants, grew up in Britain. He graduated from Southampton University in Britain and, later, the Harvard Business School, where he received an M.B.A.

According to a Harvard Business School case study about Mr. Hohn's investment in Deutsche Börse, in 1996 Mr. Hohn began working for Perry Capital, a hedge fund founded by Richard C. Perry, a former partner at Goldman Sachs. In June 2000, Mr. Perry raised money for a European-focused fund to be managed by Mr. Hohn. The fund, said the case study, achieved "superior performance of 20 percent a year over three years with little volatility" -- meaning Mr. Hohn produced outsize returns without taking the risk associated with such returns.

Like most managers who do well working within a larger fund, he set out on his own, starting TCI in January 2004. The fund would not be socially responsible but would invest in any sector it deemed undervalued. According to the Harvard case study, Mr. Hohn said, "We believe we can do greater good by making more money and giving it away."

The fund would take large bets -- for example, own shares in only a few companies -- in industries that are hard to break into.

The fund has an unconventional fee structure: instead of the standard 2 percent of assets for managing the fund and 20 percent of the profits as incentive compensation, the fund charges a 1 percent management fee and a 13 to 17 percent incentive fee. Investors then pay 0.5 percent of committed capital and 0.5 percent more if the investors' net return exceeds 11 percent, with both fees going to charities. People invest with the understanding that they cannot get the money back for three to five years, an eternity for many investors who like to be able to withdraw their money at any time.

To many potential investors, the fee structure was controversial. "It was so unusual a concept that people were suspicious," one investor said. "When you think about the hedge fund industry, you don't exactly think of charity. You think of people who are hard-driving and are always looking for an investment edge."

Mr. Hohn's track record and his dedication to philanthropy convinced people to invest. The returns paid off handsomely and contributed to money flooding into the fund. In 2004, the fund produced returns from 42 to 44 percent, depending on the class of share invested in. Returns for 2005 were even better: 50 to 52 percent, investors said.

TCI is not the only fund to focus on charitable giving. In January 2004, Andrew Walter, who worked in the investment management division of Goldman Sachs, co-founded Blue Orchid Capital, now a $300 million fund of hedge funds. He gives a portion of the fees that the fund earns to the Steamboat Foundation, a separately run charity he helped found that finances summer internships for financially strapped college students. (It also gives special grants.) As a result, he has gained access to blue-chip managers, the majority of whom do not accept money from new investors.

Blue Orchid charges about 1 percent as a management fee and a 5 to 7 percent incentive fee, according to investors. (Mr. Walter would not comment on fees or returns.) Half the incentive fee goes to the foundation.

"The consistent theme across both is we are in the business of investing in people," Mr. Walter said. "In our investment business, we are fortunate to have built a portfolio of exceptional investment managers, and in the Steamboat Foundation, we seek to make investments in extraordinary young people who come from more modest backgrounds."

The program has financed internships with institutions like Forbes magazine and the Hospital for Special Surgery. Every company that has sponsored an internship has agreed to do another. In 2005, Blue Orchid was up 12 percent, net to investors, and through October it was up 6.5 percent.

This marriage of business and philanthropy has been a theme in charitable circles in America, but it is a relatively new concept in Britain, said Susan Mackenzie, interim director of Philanthropy UK, a charity in London that promotes giving in Britain.

"We are on the cusp of a sea change," she said, citing a large increase in new wealth, the changing role of the state and the emergence of private equity and hedge fund donors as factors driving that change. The Charities Aid Foundation, a British philanthropy, reports that people in Britain with incomes over £200,000, or about $380,000, give 1.2 percent of their income to charity. In the United States, people with the same income give 7.4 percent of that wealth.

"In the U.K., people are more reluctant to talk about their wealth and their giving, and that has influenced attitudes toward giving," Ms. Mackenzie said. "Also, we have a comprehensive welfare state that influences what the government should pay for versus what individuals should pay for."

TCI is among the funds changing that dynamic. It has not been without controversy. This year, Mr. Hohn tried to raise fees retroactively on a group of investors; the move incited some to withdraw their money. "It was outrageous," said one who left.

Yale University, one of the fund's original investors, pulled out $200 million earlier this year, partly because of issues surrounding the retroactive fees. A spokesman for the university declined to comment.

But investors said there were billions of dollars of capital waiting to get into the fund, suggesting that Mr. Hohn's tactics are overshadowed by his extraordinary returns and maybe even his charitable work.

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A version of this article appears in print on November 13, 2006, on Page F00014 of the National edition with the headline: MEGAMONEY; A Hedge Fund With High Returns And High-Reaching Goals. Order Reprints|Today's Paper|Subscribe